STOCKBYTE/GETTY IMAGES
C H A P T E R
1 6
Recording Adjusting
and Closing Entries
for a Corporation
O B J E C T I V E S
After studying Chapter 16, you will be able to:
1. Identify accounting concepts and practices
related to adjusting and closing entries for
a merchandising business organized as a
corporation.
3. Record closing entries for income statement
accounts.
4. Record closing entry for dividends.
5. Prepare a post-closing trial balance.
2. Record adjusting entries.
(
Point Your Browser
www.C21accounting.com
478
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)
ACCOUNTING IN THE REAL WORLD
Apple
©KYODO/LANDOV
Recent world history would be incomplete without a reference to three computers—Apple II, Macintosh, and iMac—that pushed computer technology
beyond the standard of their day.
The Apple II was the first personal computer to gain wide distribution and
put the Apple Computer company on the technology map. The Macintosh
introduced the graphical interface and mouse technologies we now take for
granted. The iMac merged digital audio and video into traditional computer
technology to enable stunning editing of video and audio files.
Although Apple’s foundation is in computers, the
company has spread its wings into related
technology markets. The widely successful iPod is the driving force in
the popular digital music player
market. iTunes was the first
Internet site to offer legal,
digital copies of music
files. Together, iPod and
iTunes have revolutionized how people access
and play music.
Apple has clearly
demonstrated that it
can be a player in any
market that requires the
innovative application of
computer technology.
Critical Thinking
1. Identify other companies that have extended their product lines beyond
their original market.
2. Identify at least five expenses Apple incurs to support its iTunes
business.
DIGITAL VISION/GETTY IMAGES
Apple Spreads Its Wings
INTERNET
ACTIVITY
EDGAR—Part 2
Go to the homepage for EDGAR
(www.sec.gov/edgar.shtml).
Click on “Search for Company
Filings,” and then click on “Latest Filings.”
Instructions
1. Look at the most recent
filing (top of the list) and
record the company name
and the date and time the
filing was accepted.
2. Click the “Back” button
to return to “Search the
EDGAR Database” page.
Again, click on “Latest
Filings.” Scroll down the
list to find the company
filing you recorded in
instruction 1. Count and
record the number of
additional filings that
are listed.
Source: www.apple.com, www.apple-history.com
479
Copyright 2009 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.
L E S S O N
Recording Adjusting Entries
16-1
ADJUSTING ENTRIES RECORDED FROM A WORK SHEET
1
2
TRIAL BALANCE
DEBIT
CREDIT
ACCOUNT TITLE
3
4
ADJUSTMENTS
DEBIT
CREDIT
1
Cash
2
Petty Cash
3
Accounts Receivable
4
Allow. for Uncoll. Accts.
5
Merchandise Inventory
6
Supplies—Office
7
Supplies—Store
8
Prepaid Insurance
28
Income Summary
(d)
45
Supplies Expense—Office
(a)
46
Supplies Expense—Store
(b)
47
Uncollectible Accounts Expense
(e)
48
Utilities Expense
29 0 8 0 28
3 0 0 00
14 6 9 8 40
2. Date
3
(e)
1 2 4 5 00
(d)158 4 0 00
(a) 2 7 3 0 00
(b) 2 9 1 0 00
(c) 3 1 7 0 00
140 4 8 0 00
3 4 8 0 00
3 9 4 4 00
5 8 0 0 00
158 4 0 00
3 8 2 0 00
18 0 0 0 00
1. Heading
1
2
3
4
5
6
7
16
17
6
7
8
45
46
47
5 8 8 9 24
49
7. Credit
5. Debit
PAGE
DOC. POST.
NO.
REF.
DEBIT
15
CREDIT
1
Adjusting Entries
Dec. 31 Uncollectible Accounts Expense
Allowance for Uncoll. Accounts
31 Income Summary
Merchandise Inventory
31 Supplies Expense—Office
Supplies—Office
20--
2
3
5
48
(h)
4. Account Debited
ACCOUNT TITLE
4
28
2 7 3 0 00
2 9 1 0 00
1 2 4 5 00
GENERAL JOURNAL
DATE
3. Identify the
first adjustment.
2
1 2 7 52
Federal Income Tax Expense
49
1
1
4
5 12 4 5 00
2
12 4 5 00 73
6
15 8 4 0 00
4
15 8 4 0 00
2 7 3 0 00
6
2 7 3 0 00
31 Federal Income Tax Expense
Federal Income Tax Payable
5 8 8 9 24
7
16
5 8 8 9 24
18
5
17
18
6. Account Credited
480
Chapter 16
Recording Adjusting and Closing Entries for a Corporation
Copyright 2009 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.
General ledger account balances are changed only by posting journal entries. Two types of journal entries change
general ledger account balances at the end of a fiscal
period: (1) Adjusting entries bring general ledger account
balances up to date. (2) Closing entries prepare temporary
accounts for the next fiscal period. [CONCEPT: Match-
S T E P S
ing Expenses with Revenue] Adjusting entries recorded in
a work sheet are journalized in a general journal. Hobby
Shack begins the adjusting entries on a new general journal page. The adjusting entries are entered in the Debit
and Credit columns of the general journal.
RECORDING ADJUSTING ENTRIES IN A GENERAL JOURNAL
1
Write the heading, Adjusting Entries, in the middle of the general journal’s Account Title column. This heading
explains all of the adjusting entries that follow. Therefore, indicating a source document is unnecessary. The first
adjusting entry is recorded on the first two lines below the heading.
2
For the first adjusting entry in the work sheet Adjustments columns, write the date, Dec. 31, 20--, in the Date column.
3
Scan down the Adjustments column of the work sheet to identify the first adjustment, (e), to Allowance for Uncollectible Accounts. Identify the debit and credit parts of this entry.
4
Write the title of the account debited in the Account Title column.
5
Write the debit adjustment amount in the Debit column.
6
Write the title of the account credited in the Account Title column,
indented about 1 centimeter.
7
Write the credit adjustment amount in the Credit column.
8
Continue down the Adjustments columns, repeating Steps 4 through
7 for each of the additional adjustments.
R E M E M B E R
Remember to start a
new general journal page
for adjusting entries.
CHARACTER COUNTS
PHOTO: DIGITAL VISION/GETTY IMAGES
In s i d e r Tra d i ng
Ben Levine works in the research unit of a large chemical
company. His group has recently discovered a new chemical process that will revolutionize how household cleaning
products are manufactured. The discovery should have a
significant positive impact on his company’s profitability
and its stock price.
Ben purchases shares of his company every month
through a payroll deduction program. He is considering using a large portion of his savings to buy additional
shares of the company. Since you are the ethics officer of
the company, he has asked your opinion on his proposed
stock purchase.
Recording Adjusting Entries
Instructions
Access the Code of Business Conduct of Dow at
www.dow.com. Using
this code of conduct as
a guide, provide Ben
with guidance on his
proposed stock purchase. Can Ben continue
his monthly purchases?
Lesson 16-1
Copyright 2009 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.
481
ADJ USTI NG E NTRY FO R ALLOWANCE FO R
UNCOLLEC TIBLE ACCOUNTS
GENERAL JOURNAL
DATE
1
ACCOUNT TITLE
PAGE
DOC. POST.
NO.
REF.
Adjusting Entries
Dec. 31 Uncollectible Accounts Expense
Allowance for Uncoll. Accounts
3
Hobby Shack estimated that $1,245.00 of the current fiscal year’s sales on account will eventually be uncollectible.
The amount is added to the existing balance in Allowance
for Uncollectible Accounts, $127.52. The adjusted balance
of Allowance for Uncollectible Accounts, $1,372.52, is the
amount of the current accounts receivable that Hobby
Shack expects to become uncollectible.
The effect of posting the adjusting entry (e) for Uncollectible Accounts is shown in the T accounts. The debit
to Uncollectible Accounts Expense recognizes this as an
expense for the fiscal period.
CREDIT
1
20--
2
DEBIT
15
1 2 4 5 00
2
1 2 4 5 00
3
Allowance for Uncollectible Accounts
Bal.
Adj. (e)
(New Bal.
127.52
1,245.00
1,372.52)
Uncollectible Accounts Expense
Adj. (e)
1,245.00
ADJUSTING ENTRY FOR MERCHANDISE INVENTORY
GENERAL JOURNAL
DATE
ACCOUNT TITLE
DOC. POST.
NO.
REF.
PAGE
DEBIT
15
CREDIT
1
4
5
31 Income Summary
Merchandise Inventory
The merchandise inventory account has a January 1 debit
balance of $140,480.00. The inventory was counted
at the end of the fiscal period and determined to cost
$124,640.00. Adjustment (d) for $15,840.00 reduces
the cost of inventory, $140,480.00, to $124,640.00.
The effect of posting the adjusting entry for merchandise
inventory is shown in the T accounts.
15 8 4 0 00
15 8 4 0 00
Chapter 16
5
Merchandise Inventory
Bal.
(New Bal.
140,480.00
124,640.00)
Adj. (d)
15,840.00
Income Summary
Adj. (d)
482
4
15,840.00
Recording Adjusting and Closing Entries for a Corporation
Copyright 2009 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.
ADJUSTING ENTRY FOR SUPPLIES OFFICE
GENERAL JOURNAL
DATE
6
7
ACCOUNT TITLE
DOC. POST.
NO.
REF.
31 Supplies Expense—Office
Supplies—Office
PAGE
DEBIT
15
CREDIT
2 7 3 0 00
6
2 7 3 0 00
Hobby Shack counted $750.00 of office supplies on hand
at the end of the fiscal period. The balance of Supplies—
Office in the trial balance, $3,480.00, is the cost of office
supplies on hand at the beginning of the year plus the
office supplies purchased during the year. Adjustment (a)
for $2,730.00 reduces the balance in Supplies—Office
from $3,480.00 to $750.00.
The effect of posting the adjusting entry for office supplies is shown in the T accounts. The debit to Supplies
Expense—Office recognizes the amount of supplies used
during the period as an expense.
7
Supplies—Office
Bal.
(New Bal.
3,480.00
750.00)
Adj. (a)
2,730.00
Supplies Expense—Office
Adj. (a)
2,730.00
ADJUSTING ENTRY FOR SUPPLIESSTORE
GENERAL JOURNAL
DATE
8
9
ACCOUNT TITLE
DOC. POST.
NO.
REF.
31 Supplies Expense—Store
Supplies—Store
Hobby Shack also counted $1,034.00 of store supplies
on hand at the end of the fiscal period. Adjustment (b)
for $2,910.00 reduces the balance in Supplies—Store,
$3,944.00, to the current cost of store supplies on hand,
$1,034.00. The effect of posting the adjusting entry for
store supplies inventory is shown in the T accounts. The
debit to Supplies Expense—Store recognizes the amount
of supplies used during the period as an expense.
DEBIT
15
CREDIT
2 9 1 0 00
8
2 9 1 0 00
9
Supplies—Store
Bal.
(New Bal.
3,944.00
1,034.00)
Adj. (b)
2,910.00
Supplies Expense—Store
Adj. (b)
Recording Adjusting Entries
PAGE
2,910.00
Lesson 16-1
Copyright 2009 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.
483
A D J U S T I N G E N T RY FO R P R E PA I D I N S U R A N C E
GENERAL JOURNAL
DATE
ACCOUNT TITLE
PAGE
DOC. POST.
NO.
REF.
31 Insurance Expense
Prepaid Insurance
10
11
DEBIT
15
CREDIT
3 1 7 0 00
10
3 1 7 0 00
During the fiscal period, Hobby Shack paid $5,800.00
for future insurance coverage. At the end of the fiscal
year, Hobby Shack determined that the value of prepaid
insurance on December 31 is $2,630.00. Adjustment
(c) reduces Prepaid Insurance by $3,170.00, the value of
insurance used during the year.
The effect of posting the adjusting entry for Prepaid
Insurance is shown in the T accounts. The debit to Insurance Expense recognizes the amount of insurance used
during the fiscal period as an expense.
Bal.
(New Bal.
Prepaid Insurance
5,800.00
Adj. (c)
2,630.00)
Adj. (c)
Insurance Expense
3,170.00
11
3,170.00
A D J U S T I N G E N T R Y F O R D E P R E C I AT I O N
OFFICE EQUIPMENT
GENERAL JOURNAL
DATE
12
13
ACCOUNT TITLE
DOC. POST.
NO.
REF.
31 Depreciation Exp.—Office Equip.
Accum. Depr.—Office Equip.
CREDIT
12
6 5 4 0 00
13
Accum. Depr.—Office Equip.
Bal.
Adj. (f)
(New Bal.
Adj. (f)
Chapter 16
DEBIT
15
6 5 4 0 00
Hobby Shack estimated its depreciation of office equipment during the fiscal year to be $6,540.00. Adjustment
(f ) increases Accum. Depr.—Office Equip. by $6,540.00,
resulting in a new balance of $13,037.00.
The effect of posting the adjusting entry for office
equipment depreciation is shown in the T accounts. The
debit to Depreciation Exp.—Office Equip. recognizes the
depreciation as an expense for the fiscal period.
484
PAGE
6,497.00
6,540.00
13,037.00)
Depreciation Exp.—Office Equip.
6,540.00
Recording Adjusting and Closing Entries for a Corporation
Copyright 2009 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.
A D J U S T I N G E N T R Y F O R D E P R E C I AT I O N
STORE EQUIPMENT
GENERAL JOURNAL
DATE
14
15
ACCOUNT TITLE
PAGE
DOC. POST.
NO.
REF.
31 Depreciation Exp.—Store Equip.
Accum. Depr.—Store Equip.
DEBIT
15
CREDIT
5 2 5 0 00
14
5 2 5 0 00
Hobby Shack estimated its depreciation of store equipment during the fiscal year to be $5,250.00. Adjustment
(g) increases Accum. Depr.—Store Equip. by $5,250.00,
resulting in a new balance of $10,319.00.
The effect of posting the adjusting entry for store
equipment depreciation is shown in the T accounts. The
debit to Depreciation Exp.—Store Equip. recognizes the
depreciation as an expense for the fiscal period.
15
Accum. Depr.—Store Equip.
Bal.
Adj. (g)
(New Bal.
Adj. (g)
5,069.00
5,250.00
10,319.00)
Depreciation Exp.—Store Equip.
5,250.00
A D J U S T I N G E N T R Y F O R F E D E R A L I N C O M E TA X E S
GENERAL JOURNAL
DATE
16
17
ACCOUNT TITLE
DOC. POST.
NO.
REF.
31 Federal Income Tax Expense
Federal Income Tax Payable
Hobby Shack made four quarterly estimated payments
of $4,500.00. The actual federal income tax expense,
$23,889.24, was calculated based on the company’s net
income before federal income tax. Hobby Shack must
make an extra payment of $5,889.24 to pay its tax liability. Adjustment (h) increases Federal Income Tax Expense
by $5,889.24, resulting in a new balance of $23,889.24.
The adjustment also creates the $5,889.24 tax liability.
The effect of posting the adjusting entry for federal
income tax is shown in the T accounts.
Recording Adjusting Entries
PAGE
DEBIT
15
CREDIT
5 8 8 9 24
16
5 8 8 9 24
17
Federal Income Tax Payable
Adj. (h)
(New Bal.
5,889.24
5,889.24)
Federal Income Tax Expense
Bal.
Adj. (h)
(New Bal.
18,000.00
5,889.24
23,889.24)
Lesson 16-1
Copyright 2009 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.
485
End of Lesson
REVIEW
AUDIT YOUR UNDERSTANDING
1. When adjusting entries are journalized, why is no source document
recorded?
2. What adjusting entry is recorded for a merchandising business that is
not recorded for a service business?
3. What balance sheet account is increased from a zero balance after
adjusting entries are journalized and posted?
WORK TOGETHER 161
Journalizing adjusting entries
The work sheet for Discount Books, Inc., is given in the Working Papers. Your instructor will guide you through the
following example.
1. Record the appropriate adjusting entries on page 18 of a general journal provided in the Working Papers. Use
December 31 of the current year as the date. Save your work to complete Work Together 16-2.
ON YOUR OWN 161
Journalizing adjusting entries
The work sheet for Sturgis Supply, Inc., is given in the Working Papers. Work this problem independently.
1. Record the appropriate adjusting entries on page 24 of a general journal provided in the Working Papers. Use
December 31 of the current year as the date. Save your work to complete On Your Own 16-2.
486
Chapter 16
Recording Adjusting and Closing Entries for a Corporation
Copyright 2009 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.
L E S S O N
Recording Closing Entries for
Income Statement Accounts
16-2
Closing entries for a corporation are made from information in a work sheet. Closing entries for revenue and
expense accounts are similar to those for proprietorships.
A corporation’s closing entries to close net income and
temporary equity accounts are also similar to those for a
proprietorship. However, these closing entries affect different accounts. A corporation records four closing entries:
2. A closing entry for income statement accounts with
debit balances (cost, contra revenue, and expense
accounts)
3. A closing entry to record net income or net loss in the
retained earnings account and close the income summary account
4. A closing entry for the dividends account
1. A closing entry for income statement accounts with
credit balances (revenue and contra cost accounts)
THE INCOME SUMMARY ACCOUNT
At the end of a fiscal period, the temporary accounts are
closed to prepare the general ledger for the next fiscal
period. [CONCEPT: Matching Expenses with Revenue]
To close a temporary account, an amount equal to its balance is recorded on the side opposite the balance.
Amounts needed for the closing entries are obtained
from the Income Statement and Balance Sheet columns
of the work sheet and from the statement of stockholders’ equity. Closing entries are recorded in the general
journal.
Chapter 8 discusses the difference between permanent
accounts and temporary accounts. Permanent accounts,
also referred to as real accounts, include the asset and liability accounts as well as the owners’ capital accounts. The
ending account balances of permanent accounts for one
fiscal period are the beginning account balances for the
next fiscal period. Temporary accounts, also referred to as
nominal accounts, include the revenue, cost, expense, and
dividend accounts.
Another temporary account is used to summarize
the closing entries for revenue, cost, and expenses. The
account is titled Income Summary because it is used to
summarize information about net income. Income Summary is used only at the end of a fiscal period to help
prepare other accounts for a new fiscal period.
The income summary account is unique because
it does not have a normal balance side. The balance of
this account is determined by the amounts posted to the
account at the end of a fiscal period. When revenue is
greater than total expenses, resulting in a net income, the
income summary account has a credit balance, as shown
in the T account.
Income Summary
Debit
Total expenses
Credit
Revenue (greater than expenses)
(Credit balance is the net income.)
R E M E M B E R
The income summary account is
used only at the end of the fiscal
period to help prepare other
accounts for a new fiscal period.
Recording Closing Entries for Income Statement Accounts
Lesson 16-2
Copyright 2009 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.
487
CLOSING E NTRY FOR ACCOUNTS WITH CRE DIT BAL ANCES
1
2
TRIAL BALANCE
DEBIT
CREDIT
ACCOUNT TITLE
29
Sales
30
Sales Discount
31
Sales Returns and Allowances
32
Purchases
33
Purchases Discount
34
Purch. Returns and Allowances
5
6
INCOME STATEMENT
DEBIT
CREDIT
495 1 2 0 00
3
495 1 2 0 00
2 5 8 48
3 1 2 7 28
209 9 6 0 00
2 5 8 48
3 1 2 7 28
209 9 6 0 00
1 6 4 8 15
3 4 8 4 95
1 6 4 8 15
3 4 8 4 95
1. Heading
GENERAL JOURNAL
DATE
ACCOUNT TITLE
2. Date
PAGE
DOC. POST.
NO.
REF.
22 Dec. 31 Sales
4
5
CREDIT
1
20--
3
DEBIT
16
1 Closing Entries
1
3. Debit to
Close
3
495 1 2 0 00
1 6 4 8 15
3 4 8 4 95
Purchases Discount
Purchases Returns and Allowances
Income Summary 4
2
3
4
500 2 5 3 10
5
4. Credit to Income Summary
Hobby Shack’s work sheet has three income statement
accounts with credit balances. One account, Sales, is a
revenue account. The other two accounts, Purchases Discount and Purchases Returns and Allowances, are contra
cost accounts. Each account has a normal credit balance
that must be reduced to zero to prepare the account for
the next fiscal period. [CONCEPT: Matching Expenses
with Revenue]
To reduce each balance to zero, each account is debited
for the amount of the balance. The impact of the closing
entry on the sales account is shown in the T account.
Sales
Closing
495,120.00
Bal.
495,120.00
(New Bal. zero)
Income Summary is credited for $500,253.10, the total
of the three debits in this closing entry.
Income Summary
Adj. (mdse. inv.) 15,840.00
S T E P S
CLOSING INCOME
STATEMENT
ACCOUNTS WITH
CREDIT BALANCES
1
Write the heading, Closing Entries, in the middle
of the general journal’s Account Title column
on a new page. This heading explains all of the
closing entries that follow. Therefore, indicating
a source document is unnecessary. The first closing entry is recorded on the first four lines below
the heading.
2
Write the date, Dec. 31, 20--, in the Date column.
3
Write the account title of each revenue and
contra cost account in the Account Title column.
Write the balance of each revenue and contra
cost account in the Debit column.
4
Write the title of the account credited, Income
Summary, in the Account Title column,
indented about 1 centimeter. Write the amount,
$500,253.10, in the Credit column.
Closing
500,253.10
(credit accounts)
The balance in Income Summary will be adjusted by
other closing entries.
488
Chapter 16
Recording Adjusting and Closing Entries for a Corporation
Copyright 2009 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.
C L O S I N G E N T R Y F O R I N C O M E S TAT E M E N T
ACCOUNTS WITH DE BIT BAL ANCES
1
28
Income Summary
29
Sales
30
Sales Discount
31
Sales Returns and Allowances
32
Purchases
33
Purchases Discount
34
Purch. Returns and Allowances
35
Advertising Expense
36
Cash Short and Over
37
Credit Card Fee Expense
48
Utilities Expense
49
Federal Income Tax Expense
1. Date
2
5
6
INCOME STATEMENT
DEBIT
CREDIT
TRIAL BALANCE
DEBIT
CREDIT
ACCOUNT TITLE
15 8 4 0 00
495 1 2 0 00
495 1 2 0 00
2 5 8 48
3 1 2 7 28
209 9 6 0 00
2 5 8 48
3 1 2 7 28
209 9 6 0 00
1 6 4 8 15
3 4 8 4 95
1 6 4 8 15
3 4 8 4 95
3 6 0 0 00
1 9 25
3 3 8 5 00
3 6 0 0 00
1 9 25
3 3 8 5 00
3 8 2 0 00
18 0 0 0 00
3 8 2 0 00
23 8 8 9 24
2. Account Debited
4. Debit Amount
GENERAL JOURNAL
DATE
ACCOUNT TITLE
2
1 31 Income Summary
1
6
7
8
9
10
11
3
12
13
14
Sales Discount
Sales Returns and Allow.
Purchases
Advertising Expense
Cash Short and Over
Credit Card Fee Expense
Depr. Exp.—Office Equipment
Depr. Exp.—Store Equipment
Utilities Expense
Federal Income Tax Expense
23
24
Hobby Shack’s work sheet has many income statement
accounts with debit balances—contra revenue accounts,
Purchases, and the expense accounts. These debit balances
must be reduced to zero to prepare the accounts for the
S T E P S
PAGE
DOC. POST.
NO.
REF.
DEBIT
16
CREDIT
1
4 404 0 9 9 15
6
2 5 8 48
3 1 2 7 28
209 9 6 0 00
3 6 0 0 00
1 9 25
3 3 8 5 00
6 5 4 0 00
5 2 5 0 00
3 8 2 0 00
23 8 8 9 24
7
8
9
3. Credit
to Close
10
11
12
3
13
14
23
24
next fiscal period. [CONCEPT: Matching Expenses with
Revenue] To reduce the balances to zero, the accounts are
credited for the amount of their balances. Income Summary is debited for the total amount.
CLOSING INCOME STATEMENT ACCOUNTS WITH DEBIT BALANCES
1
Write the date, 31, in the Date column.
2
Write the title of the account debited, Income Summary, in the Account Title column. The debit to Income
Summary is not entered in the amount column until all contra revenue, cost, and expense balances have been
journalized and the total amount calculated.
3
Write the account title of each contra revenue, cost, and expense account in the Account Title column, each
indented about 1 centimeter. Write the balance of each cost and expense account in the Credit column.
4
Add the credit amounts for this entry. Write the total of the credited accounts, $404,099.15, in the Debit
column on the same line as the account title Income Summary.
Recording Closing Entries for Income Statement Accounts
Lesson 16-2
Copyright 2009 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.
489
SUMMARY OF CLOSING ENTRY FOR INCOME
S TAT E M E N T A C C O U N T S W I T H D E B I T B A L A N C E S
The second closing entry reduces the balance of the contra revenue, Purchases, and expense accounts to a zero
balance. The effect of the closing entry on Purchases is
shown in the T account.
Purchases
Bal.
209,960.00
(New Bal. zero)
Closing
209,960.00
After recording this closing entry, Income Summary has
three amounts:
1. A debit of $15,840.00, the amount of the merchandise inventory adjustment
2. A credit of $500,253.10, the amount of the entry to
close the revenue and contra cost accounts
3. A debit of $404,099.15, the amount of the entry to
close the contra revenue, cost, and expense accounts
Income Summary
Adj. (mdse. inv.) 15,840.00 Closing (credit
Closing (debit
amounts)
500,253.10
accounts)
404,099.15 (New Bal.
80,313.95)
The credit balance of Income Summary, $80,313.95, is
equal to the net income amount shown on the work sheet.
However, Income Summary is not closed as part of this
closing entry. Instead, the account is closed with the third
closing entry when net income is recorded.
F O R YO U R I N F O R M AT I O N
FSTOP/GETTY IMAGES
F Y I
A document that outlines
the mission and goals of a
corporation is known as a
strategic plan. The management
of a corporation uses the strategic
plan as a guiding light to
ensure that all business
decisions work toward
achieving its goals.
SMALL BUSINESS
S P O T L I G H T
Buying a franchise is a popular way to
start a small business. Franchises are
particularly appealing to people with
less experience because the failure rate
is much lower than that of other new
businesses. Advantages of purchasing
a franchise include the franchise’s
proven reputation, established
customers, and time-tested business
procedures. Disadvantages include
the franchisee’s sometimes-limited
control over the new business and the
relatively high initial fees attached
to the purchase of a franchise.
490
Chapter 16
Recording Adjusting and Closing Entries for a Corporation
Copyright 2009 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.
CLOSING ENTRY TO RECORD NET INCOME
1. Date
2. Debit Income Summary
3. Credit Retained Earnings
GENERAL JOURNAL
DATE
PAGE
DOC. POST.
NO.
REF.
ACCOUNT TITLE
20--
24
1 31 Income Summary
DEBIT
CREDIT
2 80 3 1 3 95
Retained Earnings
25
16
3
24
80 3 1 3 95
After closing entries for the income statement accounts
are posted, Income Summary has a credit balance of
$80,313.95. This credit balance equals the net income
calculated on the work sheet.
A corporation’s net income should be recorded in the
retained earnings account at the end of the fiscal year.
After the closing entry is posted, Income Summary has a
zero balance.
The new balance in retained earnings, $91,075.24, does
not yet equal the amount reported on the statement of
stockholders’ equity. The fourth closing entry is required
to adjust Retained Earnings to the correct amount.
25
Income Summary
Adj. (mdse. inv.) 15,840.00 Closing (credit
Closing (debit
accounts)
500,253.10
accounts)
404,099.15
Closing (retained
earnings)
80,313.95 (New Bal. zero)
Retained Earnings
Bal.
10,761.29
Closing (Income
Summary)
80,313.95
(New Bal.
91,075.24)
CLOSING ENTRY FOR DIVIDENDS
1. Date
2. Debit Retained Earnings
3. Credit Dividends
GENERAL JOURNAL
DATE
ACCOUNT TITLE
DOC. POST.
NO.
REF.
20--
26
27
PAGE
1 31 Retained Earnings
2 20 0 0 0 00
Dividends
Because dividends decrease the earnings retained by a
corporation, the dividends account is closed to Retained
Earnings. After the closing entry for the dividends account
is posted, Dividends has a zero balance. The amount of
the dividends, $20,000.00, has reduced the balance of
Retained Earnings. The new balance in Retained Earnings,
$71,075.24, now equals the amount reported on the
statement of stockholders’ equity. Therefore, the retained
earnings account is now up to date.
DEBIT
16
CREDIT
3
26
20 0 0 0 00
Closing
(dividends)
Bal.
27
Retained Earnings
Bal.
10,761.29
Closing (Income
20,000.00
Summary) 80,313.95
(New Bal.
71,075.24)
Dividends
20,000.00 Closing
(dividends) 20,000.00
(New Bal. zero)
Recording Closing Entries for Income Statement Accounts
Lesson 16-2
Copyright 2009 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.
491
COMPLETED CLOSING ENTRIES FOR A
C O R P O R AT I O N R E C O R D E D I N A J O U R N A L
GENERAL JOURNAL
DATE
ACCOUNT TITLE
20--
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
DEBIT
16
CREDIT
Closing Entries
1
2
DOC. POST.
NO.
REF.
PAGE
Dec. 31 Sales
Purchases Discount
Purchases Ret. and Allow.
Income Summary
31 Income Summary
Sales Discount
Sales Returns and Allow.
Purchases
Advertising Expense
Cash Short and Over
Credit Card Fee Expense
Depr. Exp.—Office Equipment
Depr. Exp.—Store Equipment
Insurance Expense
Miscellaneous Expense
Payroll Taxes Expense
Rent Expense
Salary Expense
Supplies Expense—Office
Supplies Expense—Store
Uncollectible Accounts Expense
Utilities Expense
Federal Income Tax Expense
31 Income Summary
Retained Earnings
31 Retained Earnings
Dividends
Hobby Shack’s general journal appears as shown above,
after all closing entries have been recorded.
The next step would be to post the adjusting and closing entries to the general ledger.
1
495 1 2 0 00
1 6 4 8 15
3 4 8 4 95
2
3
4
500 2 5 3 10
404 0 9 9 15
5
6
2 5 8 48
3 1 2 7 28
209 9 6 0 00
3 6 0 0 00
1 9 25
3 3 8 5 00
6 5 4 0 00
5 2 5 0 00
3 1 7 0 00
2 5 6 4 90
9 1 0 5 00
18 0 0 0 00
104 5 2 5 00
2 7 3 0 00
2 9 1 0 00
1 2 4 5 00
3 8 2 0 00
23 8 8 9 24
80 3 1 3 95
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
80 3 1 3 95
20 0 0 0 00
26
27
20 0 0 0 00
28
OP
FST
/GE
TTY
IMAG
ES
F O R YO U R I N F O R M AT I O N
F Y I
If a corporation has a net loss,
Income Summary has a debit
balance. Retained Earnings
would then be debited and
Income Summary credited
for the net loss amount.
492
Chapter 16
Recording Adjusting and Closing Entries for a Corporation
Copyright 2009 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.
End of Lesson
REVIEW
AUDIT YOUR UNDERSTANDING
1. Where is the information obtained for journalizing closing entries for
revenue, cost, and expenses?
2. What is the name of the temporary account that is used to summarize
the closing entries for revenue, cost, and expenses?
WORK TOGETHER 162
Journalizing closing entries
Use the work sheet of Discount Books, Inc., from Work Together 16-1. A general journal is given in the Working
Papers. Your instructor will guide you through the following example.
1. Record the following closing entries on page 19 of the general journal.
a. Close the income statement accounts with credit balances.
b. Close the income statement accounts with debit balances.
c. Close Income Summary.
d. Close the dividend account.
ON YOUR OWN 162
Journalizing closing entries
Use the work sheet of Sturgis Supply, Inc., from On Your Own 16-1. A general journal is given in the Working Papers.
Work this problem independently.
1. Record the following closing entries on page 25 of the general journal.
a. Close the income statement accounts with credit balances.
b. Close the income statement accounts with debit balances.
c. Close Income Summary.
d. Close the dividend account.
Recording Closing Entries for Income Statement Accounts
Lesson 16-2
Copyright 2009 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.
493
L E S S O N
Preparing a Post-Closing
Trial Balance
16-3
COMPLETED GENERAL LEDGER AFTER ADJUSTING
AND CLOSING ENTRIES ARE POSTED
Cash
ACCOUNT
POST.
REF.
ITEM
20--
DEBIT
DEBIT
CREDIT
20--
DEBIT
DEBIT
⻫
Dec. 31 Balance
DATE
POST.
REF.
20--
DEBIT
⻫
Dec. 31 Balance
POST.
REF.
ITEM
20--
DEBIT
1135
DEBIT
CREDIT
ACCOUNT NO.
20--
DATE
POST.
REF.
ITEM
20--
DEBIT
POST.
REF.
20--
DEBIT
1145
DATE
⻫
G15
Dec. 31 Balance
31
DEBIT
2 7 3 0 00
CREDIT
DATE
ITEM
20--
DEBIT
⻫
G15
Dec. 31 Balance
31
DEBIT
2 9 1 0 00
DATE
20--
DEBIT
3 1 7 0 00
DATE
DATE
DEBIT
CREDIT
ACCOUNT
DATE
ITEM
20--
ACCOUNT
DEBIT
ITEM
20--
CREDIT
CREDIT
DEBIT
20--
ACCOUNT
CREDIT
⻫
Dec. 31 Balance
20--
Dec. 31 Balance
31
ITEM
POST.
REF.
⻫
G15
CREDIT
2 3 3 55
2160
ACCOUNT NO.
ITEM
20--
1215
ACCOUNT
CREDIT
BALANCE
DEBIT
CREDIT
1 0 0 8 00
ACCOUNT NO.
POST.
REF.
DEBIT
CREDIT
2165
BALANCE
DEBIT
CREDIT
6 0 00
ACCOUNT NO.
POST.
REF.
DEBIT
CREDIT
2170
BALANCE
DEBIT
DATE
CREDIT
⻫
7 0 00
Dividends Payable
Dec. 31 Balance
BALANCE
DEBIT
DEBIT
United Way Donations Payable
Dec. 31 Balance
CREDIT
ITEM
ACCOUNT NO.
POST.
REF.
⻫
DEBIT
CREDIT
2180
BALANCE
DEBIT
CREDIT
5 0 0 0 00
CREDIT
4 0 8 4 9 50
Acc. Depr.— Store Equipment
DATE
DEBIT
1210
6 4 9 7 00
13 0 3 7 00
6 5 4 0 00
DEBIT
2155
BALANCE
⻫
Dec. 31 Balance
BALANCE
ACCOUNT NO.
POST.
REF.
CREDIT
U.S. Savings Bonds Payable
DATE
20--
ITEM
DEBIT
1205
BALANCE
DEBIT
Store Equipment
DATE
ACCOUNT NO.
⻫
Dec. 31 Balance
ACCOUNT NO.
⻫
G15
CREDIT
3 4 60
POST.
REF.
ITEM
3 5 8 6 4 50
POST.
REF.
DEBIT
⻫
DATE
20--
2150
BALANCE
CREDIT
Health Insurance Premiums Payable
DATE
5 8 0 0 00
2 6 3 0 00
Acc. Depr.— Office Equipment
Dec. 31 Balance
31
ACCOUNT NO.
DEBIT
POST.
REF.
ITEM
ACCOUNT
ACCOUNT
CREDIT
BALANCE
CREDIT
⻫
DEBIT
⻫
20--
1160
ACCOUNT NO.
POST.
REF.
ITEM
20--
2145
BALANCE
CREDIT
2 5 5 6 70
POST.
REF.
Dec. 31 Balance
DEBIT
Office Equipment
Dec. 31 Balance
DEBIT
Unemployment Tax Payable—State
ACCOUNT
ACCOUNT
CREDIT
⻫
Dec. 31 Balance
3 9 4 4 00
1 0 3 4 00
CREDIT
⻫
G15
Dec. 31 Balance
31
DEBIT
3 9 9 42
POST.
REF.
ITEM
ACCOUNT
ACCOUNT NO.
POST.
REF.
ITEM
2140
BALANCE
CREDIT
CREDIT
Prepaid Insurance
ACCOUNT
DEBIT
ACCOUNT NO.
20--
1150
BALANCE
CREDIT
CREDIT
1 4 5 1 38
Unemployment Tax Payable—Federal
DATE
ACCOUNT NO.
POST.
REF.
DEBIT
⻫
ITEM
ACCOUNT
3 4 8 0 00
7 5 0 00
Supplies—Store
ACCOUNT
2135
BALANCE
CREDIT
ACCOUNT NO.
Dec. 31 Balance
BALANCE
CREDIT
DEBIT
Sales Tax Payable
ACCOUNT
ACCOUNT NO.
ITEM
7 5 7 00
POST.
REF.
ITEM
20--
DATE
CREDIT
Medicare Tax Payable
Dec. 31 Balance
CREDIT
140 4 8 0 00
15 8 4 0 00 124 6 4 0 00
Supplies—Office
ACCOUNT
DEBIT
ACCOUNT NO.
20--
DEBIT
2130
BALANCE
CREDIT
1140
BALANCE
CREDIT
⻫
G15
DEBIT
⻫
Dec. 31 Balance
DATE
Dec. 31 Balance
31
5 8 8 9 24
ACCOUNT NO.
POST.
REF.
ITEM
ACCOUNT
Merchandise Inventory
ACCOUNT
CREDIT
⻫
DATE
1 2 7 52
1 3 7 2 52
1 2 4 5 00
DEBIT
Social Security Tax Payable
ACCOUNT
BALANCE
CREDIT
⻫
G15
Dec. 31 Balance
31
20--
Dec. 31 Balance
ACCOUNT NO.
BALANCE
CREDIT
5 8 8 9 24
POST.
REF.
ITEM
2120
ACCOUNT NO.
DEBIT
G15
DATE
146 9 8 40
CREDIT
Employee Income Tax Payable
ACCOUNT
CREDIT
Allow. for Uncoll. Acc.
DATE
20--
DEBIT
DEBIT
115 8 3 03
POST.
REF.
ITEM
Dec. 31 Balance
BALANCE
CREDIT
BALANCE
CREDIT
⻫
DATE
1130
DEBIT
Federal Income Tax Payable
ACCOUNT
3 0 0 00
ACCOUNT NO.
ITEM
ACCOUNT
1120
CREDIT
Accounts Receivable
ACCOUNT
20--
BALANCE
CREDIT
2110
ACCOUNT NO.
POST.
REF.
ITEM
Dec. 31 Balance
ACCOUNT NO.
POST.
REF.
ITEM
DATE
290 8 0 28
Petty Cash
DATE
Accounts Payable
ACCOUNT
BALANCE
CREDIT
⻫
Dec. 31 Balance
ACCOUNT
1110
ACCOUNT NO.
DATE
ACCOUNT NO.
DEBIT
CREDIT
5 2 5 0 00
1220
BALANCE
DEBIT
CREDIT
5 0 6 9 00
10 3 1 9 00
Hobby Shack’s completed general ledger after adjusting
and closing entries are posted is shown above and on the
following page.
Balance sheet accounts (asset, liability, and capital
accounts) have up-to-date balances to begin the new fiscal
period.
Income statement accounts (revenue, cost, and expense
accounts) have zero balances to begin the new fiscal period.
[CONCEPT: Matching Expenses with Revenue]
494
Recording Adjusting and Closing Entries for a Corporation
Chapter 16
Copyright 2009 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.
COMPLETED GENERAL LEDGER AFTER ADJUSTING
AN D CLOSI NG E NTR I ES AR E POSTE D CONCLUDE D
Captial Stock
ACCOUNT
DATE
ACCOUNT NO.
POST.
REF.
ITEM
20--
DATE
20--
DEBIT
POST.
REF.
ITEM
DEBIT
⻫
G16
G16
1 Balance
31
31
CREDIT
DEBIT
80 3 1 3 95
20--
DEBIT
⻫
G16
Dec. 31 Balance
31
DEBIT
DATE
20--
Dec. 31 Balance
31
31
31
DEBIT
15 8 4 0 00
G15
500 2 5 3 10
G16
G16 404 0 9 9 15
80 3 1 3 95
G16
DATE
20--
Dec. 31 Balance
31
3140
20--
DEBIT
4110
DATE
ACCOUNT
Sales Discount
DATE
ITEM
ACCOUNT NO.
4120
20--
DEBIT
⻫
G16
Dec. 31 Balance
31
DEBIT
2 5 8 48
2 5 8 48
----------------------------
Sales Returns and Allowances
ACCOUNT
4130
DATE
POST.
REF.
ITEM
DEBIT
⻫
G16
Dec. 31 Balance
31
DEBIT
CREDIT
3 1 2 7 28
----------------------------
3 1 2 7 28
Purchases
ACCOUNT
-------------------------------------------------------
ACCOUNT NO.
5110
POST.
REF.
ITEM
20--
DEBIT
⻫
G16
Dec. 31 Balance
31
DEBIT
209 9 6 0 00
CREDIT
209 9 6 0 00
---------------------------- ----------------------------
Purchases Discount
ACCOUNT
ACCOUNT NO.
POST.
REF.
ITEM
20--
⻫
G16
Dec. 31 Balance
31
ACCOUNT
DEBIT
1 6 4 8 15
DEBIT
CREDIT
----------------------------
1 6 4 8 15
----------------------------
Purch. Returns and Allowances
Salary Expense
DATE
ITEM
ITEM
20--
⻫
G16
Dec. 31 Balance
31
ACCOUNT
POST.
REF.
ACCOUNT NO.
DEBIT
5130
3 4 8 4 95
DEBIT
CREDIT
----------------------------
3 4 8 4 95
----------------------------
Advertising Expense
ACCOUNT NO.
6105
ITEM
20--
DEBIT
⻫
G16
Dec. 31 Balance
31
ACCOUNT
POST.
REF.
CREDIT
3 6 0 0 00
BALANCE
DEBIT
CREDIT
3 6 0 0 00
----------------------------
----------------------------
Cash Short and Over
20--
Dec. 31 Balance
31
ITEM
ACCOUNT NO.
POST.
REF.
DEBIT
⻫
G16
CREDIT
6110
1 9 25
BALANCE
DEBIT
CREDIT
1 9 25
----------------------------
----------------------------
DEBIT
CREDIT
DEBIT
CREDIT
18 0 0 0 00
---------------------------- ----------------------------
DEBIT
ITEM
ACCOUNT
104 5 2 5 00
DEBIT
CREDIT
104 5 2 5 00
----------------------------
----------------------------
Dec. 31 Balance
31
ACCOUNT
2 7 3 0 00
DEBIT
CREDIT
2 7 3 0 00
----------------------------
POST.
REF.
POST.
REF.
G15
G16
ITEM
DEBIT
2 9 1 0 00
DEBIT
CREDIT
2 9 1 0 00
----------------------------
----------------------------
ACCOUNT NO.
DEBIT
1 2 4 5 00
1 2 4 5 00
Dec. 31 Balance
31
31
6165
BALANCE
CREDIT
DEBIT
CREDIT
1 2 4 5 00
----------------------------
----------------------------
ACCOUNT NO.
POST.
REF.
DEBIT
CREDIT
3 8 2 0 00
POST.
REF.
⻫
G15
G16
6170
BALANCE
DEBIT
CREDIT
3 8 2 0 00
----------------------------
Federal Income Tax Expense
ITEM
6160
BALANCE
CREDIT
2 9 1 0 00
⻫
G16
Dec. 31 Balance
31
ACCOUNT
----------------------------
ACCOUNT NO.
Utilities Expense
DATE
20--
BALANCE
CREDIT
2 7 3 0 00
G15
G16
ITEM
6155
ACCOUNT NO.
DEBIT
Uncollectible Accounts Expense
DATE
6150
BALANCE
CREDIT
Supplies Expense—Store
DATE
6145
BALANCE
CREDIT
18 0 0 0 00
G15
G16
DATE
Preparing a Post-Closing Trial Balance
DEBIT
POST.
REF.
ITEM
ACCOUNT
6140
9 1 0 5 00
---------------------------- ----------------------------
Supplies Expense—Office
DATE
20--
DATE
----------------------------
BALANCE
CREDIT
⻫
G16
20--
DATE
CREDIT
ACCOUNT NO.
Dec. 31 Balance
31
BALANCE
CREDIT
DEBIT
2 5 6 4 90
----------------------------
9 1 0 5 00
POST.
REF.
20--
DATE
DEBIT
⻫
G16
Dec. 31 Balance
31
BALANCE
CREDIT
CREDIT
2 5 6 4 90
20--
DATE
DEBIT
ACCOUNT NO.
ACCOUNT
ACCOUNT
5120
6135
BALANCE
ACCOUNT NO.
Dec. 31 Balance
31
BALANCE
CREDIT
----------------------------
ACCOUNT NO.
20--
DATE
CREDIT
3 1 7 0 00
----------------------------
3 1 7 0 00
POST.
REF.
ITEM
Dec. 31 Balance
31
BALANCE
CREDIT
DEBIT
3 1 7 0 00
⻫
G16
20--
DATE
20--
6130
BALANCE
CREDIT
Rent Expense
ACCOUNT
----------------------------
ACCOUNT NO.
DEBIT
POST.
REF.
ITEM
Dec. 31 Balance
31
CREDIT
CREDIT
Payroll Taxes Expense
DATE
BALANCE
CREDIT
DEBIT
5 2 5 0 00
---------------------------- ----------------------------
5 2 5 0 00
⻫
G16
20--
POST.
REF.
BALANCE
CREDIT
5 2 5 0 00
POST.
REF.
ITEM
ACCOUNT
6125
ACCOUNT NO.
DEBIT
G15
G16
Dec. 31 Balance
31
495 1 2 0 00
----------------------------
----------------------------
6 5 4 0 00
---------------------------- ----------------------------
Miscellaneous Expense
ACCOUNT
CREDIT
CREDIT
ACCOUNT NO.
Dec. 31 Balance
31
BALANCE
DEBIT
6 5 4 0 00
POST.
REF.
ITEM
20--
DEBIT
⻫
G16 495 1 2 0 00
Dec. 31 Balance
31
6120
BALANCE
CREDIT
6 5 4 0 00
G15
G16
DATE
484 4 1 3 10
80 3 1 3 95
---------------------------- ----------------------------
CREDIT
----------------------------
Insurance Expense
ACCOUNT
1 5 8 4 0 00
DEBIT
POST.
REF.
ITEM
20--
POST.
REF.
ITEM
3 3 8 5 00
----------------------------
Depr. Exp.—Store Equipment
ACCOUNT
CREDIT
ACCOUNT NO.
DATE
CREDIT
ACCOUNT NO.
G15
G16
BALANCE
CREDIT
Sales
ACCOUNT
20--
3130
ACCOUNT NO.
DEBIT
DEBIT
3 3 8 5 00
POST.
REF.
ITEM
Dec. 31 Balance
31
2 0 0 0 0 00
---------------------------- ----------------------------
20 0 0 0 00
POST.
REF.
ITEM
DATE
CREDIT
Income Summary
ACCOUNT
⻫
G16
BALANCE
CREDIT
BALANCE
CREDIT
CREDIT
1 0 7 6 1 29
9 1 0 7 5 24
7 1 0 7 5 24
20 0 0 0 00
POST.
REF.
ITEM
DEBIT
Depr. Exp.—Office Equipment
ACCOUNT
ACCOUNT NO.
DATE
20--
3120
6115
ACCOUNT NO.
POST.
REF.
ITEM
Dec. 31 Balance
31
BALANCE
Dividends
ACCOUNT
DATE
125 0 0 0 00
ACCOUNT NO.
Credit Card Fee Expense
ACCOUNT
CREDIT
Retained Earnings
ACCOUNT
3110
BALANCE
CREDIT
⻫
Dec. 31 Balance
Dec.
DEBIT
----------------------------
ACCOUNT NO.
DEBIT
CREDIT
5 8 8 9 24
2 3 8 8 9 24
6205
BALANCE
DEBIT
CREDIT
1 8 0 0 0 00
2 3 8 8 9 24
----------------------------
----------------------------
Lesson 16-3
Copyright 2009 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.
495
P O S T C L O S I N G T R I A L B A L A N C E
1. Heading
1 Hobby Shack, Inc.
Post-Closing Trial Balance
December 31, 20-ACCOUNT TITLE
2. Accounts That
Have Balances
DEBIT
2 Cash
5. Word Totals
5
CREDIT
29 0 8 0 28
3 0 0 00
14 6 9 8 40
Petty Cash
Accounts Receivable
Allow. for Uncoll. Accts.
Merchandise Inventory
Supplies—Office
Supplies—Store
Prepaid Insurance
Office Equipment
Acc. Depr.—Office Equipment
Store Equipment
Acc. Depr.—Store Equipment
Accounts Payable
Federal Income Tax Payable
Employee Income Tax Payable
Social Security Tax Payable
Medicare Tax Payable
Sales Tax Payable
Unemployment Tax Payable—Federal
Unemployment Tax Payable—State
Health Insurance Premiums Payable
U.S. Savings Bonds Payable
United Way Donations Payable
Dividends Payable
Capital Stock
Retained Earnings
Totals
3. Balances of
Asset Accounts
1 3 7 2 52
124 6 4 0 00
3
7 5 0 00
1 0 3 4 00
2 6 3 0 00
35 8 6 4 50
13 0 3 7 00
40 8 4 9 50
6
10 3 1 9 00
11 5 8 3 03
5 8 8 9 24 4
7 5 7 00
1 4 5 1 38
3 9 9 42
2 5 5 6 70
3 4 60
2 3 3 55
1 0 0 8 00
6 0 00
7 0 00
5 0 0 0 00
125 0 0 0 00
71 0 7 5 24
249 8 4 6 68 249 8 4 6 68
6. Totals
A post-closing trial balance is prepared to prove the equality of debits and credits in the general ledger and to prepare the general ledger for the next fiscal period. Account
S T E P S
496
7. Double
Lines
balances on the post-closing trial balance agree with the
balances on the balance sheet shown in Chapter 15.
PREPARING A POSTCLOSING TRIAL BALANCE
1
Write the post-closing trial balance heading on three lines.
2
List all general ledger accounts that have balances in the Account Title column.
3
Write the balance of each asset account in the Debit column. Write the balance
of each contra account in the Credit column.
4
Write the balance of each liability and capital account in the Credit column.
5
Write the word Totals on the next line below the last account title.
6
Total the columns and write the totals, $249,846.68, on the Totals line.
7
Verify equality. Rule double lines below both column totals.
Chapter 16
7
4. Balances of
Contra Asset,
Liability and
Capital Accounts
Recording Adjusting and Closing Entries for a Corporation
Copyright 2009 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.
ACC O U N T I N G C YC L E F O R A M E R C H A N D I S I N G
B U S I N E S S O R G A N I Z E D A S A C O R P O R AT I O N
1
POST-CLOSING
TRIAL BALANCE
2
9
JOURNALS
ACCOUNTS PAYABLE LEDGER
ACCOUN
GENERAL
TS RECEIVABLE LEDGER
3
LEDGER
3
GENERAL
8
LEDGER
SCHEDULE OF
ACCOUNTS
PAYABLE
4
SCHEDULE OF
ACCOUNTS
RECEIVABLE
JOURNAL
5
7
WORK SHEET
BALANCE
SHEET
STATEMENT OF
SHOCKHOLDERS’
EQUITY
INCOME
STATEMENT
6
Service and merchandising businesses use a similar
accounting cycle. The accounting cycles are also similar
for a proprietorship and a corporation. Variations occur
S T E P S
when subsidiary ledgers are used. Variations also occur in
preparing financial statements.
ACCOUNTING CYCLE FOR A MERCHANDISING BUSINESS
1
Source documents are checked for accuracy, and transactions are analyzed into debit and credit parts.
2
Transactions, from information on source documents, are recorded in journals.
3
Journal entries are posted to the accounts payable ledger, the accounts receivable ledger, and the general ledger.
4
Schedules of accounts payable and accounts receivable are prepared from the subsidiary ledgers.
5
A work sheet, including a trial balance, is prepared from the general ledger.
6
Financial statements are prepared from the work sheet.
7
Adjusting and closing entries are journalized from the work sheet.
8
Adjusting and closing entries are posted to the general ledger.
9
A post-closing trial balance of the general ledger is prepared.
Preparing a Post-Closing Trial Balance
Lesson 16-3
Copyright 2009 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.
497
End of Lesson
REVIEW
AUDIT YOUR UNDERSTANDING
1. Which accounts are listed on a post-closing trial balance?
2. What is the purpose of preparing a post-closing trial balance?
3. In what order should accounts be listed on a post-closing trial balance?
WORK TOGETHER 163
Preparing a post-closing trial balance
For the current year, the December 31 balances for Visual Art Center’s balance sheet accounts after adjusting and
closing entries have been posted are given below. Your instructor will guide you through the following example.
Account
Cash
Petty Cash
Accounts Receivable
Merchandise Inventory
Supplies—Office
Supplies—Store
Prepaid Insurance
Accounts Payable
Sales Tax Payable
Capital Stock
Retained Earnings
Balance
$ 21,810.20
350.00
8,398.80
190,980.00
1,314.00
2,268.00
1,980.00
11,676.50
1,584.00
100,000.00
113,840.50
1. Prepare a post-closing trial balance on the form provided in the Working Papers.
ON YOUR OWN 163
Preparing a post-closing trial balance
For the current year, the December 31 balances for Welding Supply’s balance sheet accounts after adjusting and
closing entries have been posted are given below. Work this problem independently.
Account
Cash
Petty Cash
Accounts Receivable
Allow. for Uncoll. Accts.
Merchandise Inventory
Supplies
Prepaid Insurance
Equipment
Acc. Dep.—Equipment
Accounts Payable
Federal Income Tax Payable
Sales Tax Payable
Dividends Payable
Capital Stock
Retained Earnings
Balance
$ 26,485.00
500.00
15,487.00
1,457.00
134,152.00
741.00
1,000.00
25,487.00
12,450.00
13,154.00
2,489.00
1,548.00
5,000.00
50,000.00
117,754.00
1. Prepare a post-closing trial balance on the form provided in the Working Papers.
498
Chapter 16
Recording Adjusting and Closing Entries for a Corporation
Copyright 2009 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.
SUMMARY
After completing this chapter, you can:
1. Identify accounting concepts and practices
related to adjusting and closing entries for
a merchandising business organized as a
corporation.
3. Record closing entries for income statement
accounts.
4. Record closing entry for dividends.
5. Prepare a post-closing trial balance.
2. Record adjusting entries.
EXPLORE ACCOUNTING
PHOTO: PHOTOGRAPHER’S CHOICE/GETTY IMAGES
Fr e i ght C ha r ge s
When a business purchases merchandise from
a vendor, ordinarily a third-party freight
company is used to deliver the merchandise from the seller (vendor) to the buyer
(purchasing business). As part of the terms
of sale, the buyer and seller must agree on
who is responsible for the freight charges.
Those terms will be listed on the seller’s sales
invoice as either FOB shipping point or FOB
destination. FOB is an abbreviation for the phrase
“Free on Board.” FOB shipping point means that the buyer
is responsible for the freight charges. FOB destination
means that the seller is responsible for the freight charges.
Shipping point is the location where the freight company
receives the merchandise from the seller. Destination refers
to the receiving point of the buyer.
The accounting entries for freight charges can be complicated when one business is responsible for the freight
charges according to the terms of sale, but the other business pays the freight company. For example, terms of sale
may be FOB shipping point, meaning that the buyer is
Recording Adjusting and Closing Entries for a Corporation
responsible for the freight charges. However,
the freight company may require payment
in advance. Therefore, the seller pays the
freight company for the freight charges.
Four different situations may occur:
1. FOB shipping point, seller pays freight
company
2. FOB shipping point, buyer pays freight
company
3. FOB destination, seller pays freight company
4. FOB destination, buyer pays freight company
Research: Investigate this issue by reviewing collegiate
Principles of Accounting or Intermediate Accounting textbooks. Also, you might interview a merchandising business manager to determine how the business accounts
for freight charges. After completing your research, write
a report on the issue of freight charges that would clearly
explain the correct accounting procedures to a new
accounting department employee.
Chapter 16
Copyright 2009 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.
499
161
APPLICATION PROBLEM
Journalizing adjusting entries
A partial work sheet for Cellar Books, Inc., for the year ended December 31 is given in the Working Papers.
Instructions:
1. Record the appropriate adjusting entries on page 22 of the general journal provided in the Working Papers.
Use December 31 of the current year as the date.
162
APPLICATION PROBLEM
Journalizing closing entries
Use the partial work sheet for Cellar Books, Inc., given in Problem 16-1.
Instructions:
Prepare the following closing entries on page 23 of the general journal provided in the Working Papers.
1. Close the income statement accounts with credit balances.
2. Close the income statement accounts with debit balances.
3. Close Income Summary.
4. Close the dividend account.
163
APPLICATION PROBLEM
Preparing a post-closing trial balance
For the current year, the December 31 balances for the balance sheet accounts of Cellar Books, Inc., after
adjusting and closing entries have been posted are given below.
Account
Cash
Petty Cash
Accounts Receivable
Allow. for Uncoll. Accts.
Merchandise Inventory
Supplies—Office
Supplies—Store
Prepaid Insurance
Office Equipment
Acc. Dep.—Office Equipment
Store Equipment
Acc. Dep.—Store Equipment
Accounts Payable
Balance
$ 16,485.00
400.00
41,483.15
2,406.15
246,598.05
329.62
326.81
2,000.00
38,458.25
23,960.00
41,478.50
31,100.00
19,948.80
Account
Federal Income Tax Payable
Employee Income Tax Payable
Social Security Tax Payable
Medicare Tax Payable
Sales Tax Payable
Unemployment Tax Payable—Federal
Unemployment Tax Payable—State
Health Insurance Premiums Payable
U.S. Savings Bonds Payable
United Way Donations Payable
Dividends Payable
Capital Stock
Retained Earnings
Balance
$ 3,660.23
1,248.20
903.96
211.41
2,458.25
28.00
189.00
400.00
25.00
40.00
3,000.00
60,000.00
237,980.38
Instructions:
1. Prepare a post-closing trial balance on the form provided in the Working Papers.
(
Go Beyond the Book
)
For more information go to
www.C21accounting.com
500
Chapter 16
Recording Adjusting and Closing Entries for a Corporation
Copyright 2009 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.
164
APPLICATION PROBLEM
Journalizing and posting adjusting and closing entries;
preparing a post-closing trial balance
Use the partial work sheet of Wilson Paint, Inc., for the year ended December 31 of the current year, on page
502. The general ledger accounts and their balances as well as forms for completing this problem are in
the Working Papers.
Instructions:
1. Journalize the adjusting entries using page 22 of a general journal.
2. Post the adjusting entries.
3. Journalize the closing entries using page 23 of a general journal.
4. Post the closing entries.
5. Prepare a post-closing trial balance.
165
MASTERY PROBLEM
Journalizing and posting adjusting and closing entries;
preparing a post-closing trial balance
Use the partial work sheet of Northern Lights for the year ended December 31 of the current year, on page
503. The general ledger accounts and their balances as well as forms for completing this problem are in the
Working Papers.
Instructions:
1. Journalize the adjusting entries using page 18 of a general journal.
2. Post the adjusting entries.
3. Journalize the closing entries using page 19 of a general journal.
4. Post the closing entries.
5. Prepare a post-closing trial balance.
Recording Adjusting and Closing Entries for a Corporation
Chapter 16
Copyright 2009 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.
501
Partial Work Sheet for Application Problem 16-4 (Wilson Paint, Inc.)
1
ACCOUNT TITLE
1
Cash
2
Petty Cash
3
Accounts Receivable
4
Allow. for Uncoll. Accts.
5
Merchandise Inventory
6
Supplies—Office
7
Supplies—Store
8
Prepaid Insurance
9
Office Equipment
3
4
ADJUSTMENTS
DEBIT
CREDIT
6 8 4 20
274 5 3 5 33
6 1 5 8 84
5 5 4 8 55
8 0 0 0 00
22 1 5 8 66
(d)
5 8 4 7 10
4 9 1 8 50
7 2 0 0 00
(f)
3 5 8 0 00
12 4 8 0 00
15 4 8 7 99
(g)
6 1 4 0 00
(h)
1 3 5 6 14
(d)
1 4 8 3 60
12
Acc. Depr.—Store Equipment
13
Accounts Payable
14
Federal Income Tax Payable
15
Employee Income Tax Payable
16
Social Security Tax Payable
17
Medicare Tax Payable
18
Sales Tax Payable
19
Unemployment Tax Pay.—Federal
20
Unemployment Tax Pay.—State
21
Health Insurance Premiums Payable
22
U.S. Savings Bonds Payable
23
United Way Donations Payable
24
Dividends Payable
25
Capital Stock
26
Retained Earnings
27
Dividends
28
Income Summary
29
Sales
30
Sales Discount
31
Sales Returns and Allowances
32
Purchases
33
Purchases Discount
34
Purch. Returns and Allowances
35
Advertising Expense
36
Cash Short and Over
37
Credit Card Fee Expense
38
Depr. Exp.—Office Equipment
(f)
39
Depr. Exp.—Store Equipment
(g)
40
Insurance Expense
(c)
41
Miscellaneous Expense
42
Payroll Taxes Expense
43
Rent Expense
44
Salary Expense
45
Supplies Expense—Office
(a)
46
Supplies Expense—Store
(b)
47
Uncollectible Accounts Expense
(e)
48
Utilities Expense
49
Federal Income Tax Expense
Chapter 16
(a)
4 8 4 8 00
Store Equipment
Net Income after Federal Income Tax
3 5 6 0 00
(c)
11
52
(e)
1 4 8 3 60
(b)
Acc. Depr.—Office Equipment
51
5
6
INCOME STATEMENT
DEBIT
CREDIT
15 4 8 2 00
5 0 0 00
42 1 5 8 80
10
50
502
2
TRIAL BALANCE
DEBIT
CREDIT
34 1 5 8 11
1 1 2 5 58
9 0 3 96
2 1 1 41
2 3 4 5 99
2 5 60
1 7 2 80
3 5 0 00
5 0 00
6 0 00
5 0 0 0 00
125 0 0 0 00
136 8 4 3 68
20 0 0 0 00
1 4 8 3 60
724 1 8 3 99
724 1 8 3 99
1 6 9 4 48
4 1 8 9 64
331 8 0 5 18
1 6 9 4 48
4 1 8 9 64
331 8 0 5 18
3 4 1 8 47
4 6 8 4 69
3 4 1 8 47
4 6 8 4 69
14 5 1 8 00
4 60
12 1 8 0 00
3 5 8 0 00
6 1 4 0 00
7 2 0 0 00
6 4 8 1 00
14 1 8 4 60
20 1 5 0 00
168 4 8 3 60
5 4 8 4 97
30 0 0 0 00
1037 8 7 6 36 1037 8 7 6 36
5 8 4 7 10
4 9 1 8 50
3 5 6 0 00
1 3 5 6 14
34 0 8 5 34
(h)
14 5 1 8 00
4 60
12 1 8 0 00
3 5 8 0 00
6 1 4 0 00
7 2 0 0 00
6 4 8 1 00
14 1 8 4 60
20 1 5 0 00
168 4 8 3 60
5 8 4 7 10
4 9 1 8 50
3 5 6 0 00
5 4 8 4 97
313 5 6 14
34 0 8 5 34 641 7 7 7 81 733 7 7 0 75
91 9 9 2 94
733 7 7 0 75 7337 7 0 75
Recording Adjusting and Closing Entries for a Corporation
Copyright 2009 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.
Partial Work Sheet for Mastery Problem 16-5 (Northern Lights)
1
ACCOUNT TITLE
1
Cash
2
Petty Cash
3
Accounts Receivable
4
Allow. for Uncoll. Accts.
5
Merchandise Inventory
6
Supplies—Office
7
Supplies—Store
8
Prepaid Insurance
9
Office Equipment
2
TRIAL BALANCE
DEBIT
CREDIT
3
4
ADJUSTMENTS
DEBIT
CREDIT
5 1 2 4 12
2 5 0 00
14 8 4 3 30
(e)
1 2 4 55
2 1 2 0 00
3 4 8 8 14
(a) 3 1 4 8 66
(b) 5 3 4 8 84
(c) 6 0 0 0 00
(d)
154 3 1 8 22
3 4 1 5 58
6 1 8 4 56
7 0 0 0 00
21 4 8 2 66
6 4 8 0 00
(f)
3 5 8 0 00
18 4 8 0 00
8 4 1 8 36
(g)
6 1 4 0 00
(h)
9 6 5 64
10
Acc. Depr.—Office Equipment
11
Store Equipment
12
Acc. Depr.—Store Equipment
13
Accounts Payable
14
Federal Income Tax Payable
15
Employee Income Tax Payable
16
Social Security Tax Payable
17
Medicare Tax Payable
18
Sales Tax Payable
19
Unemployment Tax Pay.—Federal
20
Unemployment Tax Pay.—State
21
Health Insurance Premiums Payable
22
U.S. Savings Bonds Payable
23
United Way Donations Payable
24
Dividends Payable
25
Capital Stock
26
Retained Earnings
27
Dividends
28
Income Summary
29
Sales
30
Sales Discount
31
Sales Returns and Allowances
32
Purchases
33
Purchases Discount
34
Purch. Returns and Allowances
35
Advertising Expense
36
Cash Short and Over
37
Credit Card Fee Expense
38
Depr. Exp.—Office Equipment
(f)
39
Depr. Exp.—Store Equipment
(g)
40
Insurance Expense
(c)
41
Miscellaneous Expense
42
Payroll Taxes Expense
43
Rent Expense
44
Salary Expense
45
Supplies Expense—Office
(a)
46
Supplies Expense—Store
(b)
47
Uncollectible Accounts Expense
(e)
48
Utilities Expense
49
Federal Income Tax Expense
50
51
5
6
INCOME STATEMENT
DEBIT
CREDIT
40 4 8 1 66
4 5 8 00
5 2 8 24
1 2 3 54
1 4 1 5 30
4 00
2 7 00
2 5 0 00
4 0 00
6 0 00
4 0 0 0 00
80 0 0 0 00
89 7 6 1 21
16 0 0 0 00
(d)
3 4 8 8 14
3 4 8 8 14
514 8 1 5 35
514 8 1 5 35
2 1 5 4 94
6 1 8 4 74
301 5 4 8 60
2 1 5 4 94
6 1 8 4 74
301 5 4 8 60
2 1 5 4 65
2 8 8 9 41
2 1 5 4 65
2 8 8 9 41
2 4 9 1 95
5 25
8 1 5 4 62
3 5 8 0 00
6 1 4 0 00
6 0 0 0 00
4 1 0 00
14 1 8 4 60
15 4 0 0 00
102 2 4 0 30
4 1 5 4 51
4 0 0 0 00
730 0 2 9 61 730 0 2 9 61
Net Income after Federal Income Tax
52
Recording Adjusting and Closing Entries for a Corporation
(h)
3 1 4 8 66
5 3 4 8 84
2 1 2 0 00
9 6 5 64
30 7 9 1 28
2 4 9 1 95
5 25
8 1 5 4 62
3 5 8 0 00
6 1 4 0 00
6 0 0 0 00
4 1 0 00
14 1 8 4 60
15 4 0 0 00
102 2 4 0 30
3 1 4 8 66
5 3 4 8 84
2 1 2 0 00
4 1 5 4 51
4 9 6 5 64
30 7 9 1 28 491 7 2 0 79 519 8 5 9 41
28 1 3 8 62
519 8 5 9 41 519 8 5 9 41
Chapter 16
Copyright 2009 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.
503
166
CHALLENGE PROBLEM
Inventory auditing challenges
For most businesses, merchandise inventory is a major portion of the business’s assets. Therefore, reporting
an accurate amount on the financial statements is important to accurate financial reporting. Whether a member of the business’s accounting staff or an outside auditor audits the merchandise inventory of the business,
determining an accurate count of the merchandise inventory is very important. Different types of merchandise present different kinds of challenges for the auditor.
a. Actual count, common costs: A sports store has 50 tennis rackets, all the same model. The rackets should be
counted and multiplied times the cost per racket to determine the inventory value.
b. Actual count, unique costs: An automobile dealer has 60 new automobiles. Since each automobile probably
has a unique and significant cost, the cost of each automobile should be totaled to determine the inventory value.
c. Sampling: A hardware store has many machine bolts. Since the value of each is low and there are many
items, a small quantity may be counted or weighed. Then estimate the total cost based on the sample size
or weight.
d. Measuring/calculating: An oil company stores crude oil in large tanks. The depth of the oil in the tank can
be measured with a measuring rod; then the circumference of the tank can be measured. The total volume
of crude oil can be calculated, then divided by the volume of one barrel of crude oil to determine the total
barrels. This number can then be multiplied by the cost per barrel of crude oil.
Instructions:
How would you determine the value of the following inventory items? Record your answers in the Working
Papers.
1. Grain in a grain elevator
2. Lumber in a lumber yard
3. Diamond rings in a jewelry store
4. Nails in a home improvement store
A P P L I E D CO M M U N I C AT I O N
Public speakers are judged by the ability of the audience to remember important points of their presentation. Effective public speakers use a variety of techniques to encourage the audience to listen to their message.
Instructions: Contact an instructor in your school or a local businessperson you have heard speak at school or community functions. Ask the person to describe the techniques used to help the audience listen and remember the
message. Write a short report summarizing these techniques. Be prepared to present your report orally in class.
CASE FOR CRITICAL THINKING
Antwan Jones, a new accounting clerk, has just experienced his first closing of a fiscal period. He questions why the
adjustments on the work sheet have to be recorded in a general journal. Antwan maintains that the adjustments can
simply be posted from the work sheet. As the senior accounting clerk, how would you respond to his statement?
504
Chapter 16
Recording Adjusting and Closing Entries for a Corporation
Copyright 2009 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.
SCANS WORKPLACE COMPETENCY
Thinking Skills: Knowing how to learn
Concept: One way to learn new concepts is to build on knowledge already acquired. For example, you might learn
how to create your own filing system after using a filing system created by someone else.
Application: Describe how the financial statements and adjusting and closing entries for a corporation differ from
those of a proprietorship. Could a proprietorship prepare a statement of stockholders’ equity?
AUDITING FOR ERRORS
Editing an Accounting Policies Manual
The Sarbanes-Oxley Act requires publicly traded corporations to document and test their accounting systems. The
documentation for Mateen Supply Corporation contains the following section on the preparation of closing entries.
Identify the errors in this section of Mateen’s accounting systems documentation.
Closing Entries
After the worksheet has been completed and verified, journal entries are
recorded to close temporary accounts. Three entries are recorded:
1.
Sales and contra purchases accounts are debited for their year-end
balances. The total of the accounts is credited to Income Summary.
2.
Purchasing and expense accounts are credited for their year-balances.
The total of the accounts is debited to Income Summary.
3.
If the company had a net income, record a debit to Income Summary
for the difference of the closing entries recorded in steps 1 and 2.
If the company had a net loss, record a credit to Income Summary for
this difference. In either case, record the same amount to Retained
Earnings to balance the entry.
A N A LY Z I N G B E S T B U Y ’S F I N A N C I A L S TAT E M E N T S
Generally accepted accounting principles require several forms of earnings per share to be reported. Earnings per
share from the normal operations of the business is presented first. The effect on earnings per share from unusual,
nonrecurring events is added or deducted. The net of these items is the earnings per share that is typically reported
in the financial news.
Instructions: Use Best Buy’s Consolidated Statements of Earnings on page B-6 in Appendix B to answer the following questions.
1. What is the label given to the net earnings per share amount, and what are its components?
2. What earnings per share amount would be reported in the financial news for the most recent fiscal year?
Recording Adjusting and Closing Entries for a Corporation
Chapter 16
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505
Accounting
SOFTWARE
G R O U P I N G F I N A N C I A L S TAT E M E N T R E P O R T S
Peachtree has a feature that allows you to create and print a group of reports. Creating a group is as easy as selecting each report and giving the group a name. The group appears in the report menu along with the other reports
you have become accustomed to printing.
PEACHTREE APPLICATION PROBLEM 164
1. Open (Restore) file 16-4AP.ptb.
2. Journalize and post the adjusting entries.
3. Print the income statement, and compare the amounts with the work sheet.
4. Journalize and post the closing entries.
5. Print the December 31 general journal, the general ledger, and the post-closing trial balance.
PEACHTREE MASTERY PROBLEM 165
1. Open (Restore) file 16-5MP.ptb.
2. Journalize and post the adjusting entries.
3. Print the income statement, and compare the amounts with the work sheet.
4. Journalize and post the closing entries.
5. Print the general ledger and post-closing trial balance.
G R O U P I N G F I N A N C I A L S TAT E M E N T R E P O R T S
One way QuickBooks supports efficiency is by allowing common tasks to be completed quickly.
QuickBooks can be programmed to memorize the format of any financial statement and also to group financial
statements together. When it is time to prepare financial statements, the user can print the entire group with a
minimum of commands.
QUICKBOOKS APPLICATION PROBLEM 164
1. Open the Wilson Paint Inc. file.
2. Journalize the adjusting entries using the Make General Journal Entries window.
3. Print a Profit & Loss Standard report using January 1 and December 31 for the dates.
4. To create a year-end balance sheet in QuickBooks, it is necessary to make a closing entry to close the equity
account Dividends to Retained Earnings. Print a Trial Balance report to use for the closing transaction.
5. Use the General Journal Entries window to journalize the closing entry dated December 31.
6. Print a Journal report, a Balance Sheet Standard report, and a Trial Balance report.
7. As an optional activity, group the financial statement reports and print them. Then, record the closing entries
and print a post-closing trial balance.
QUICKBOOKS MASTERY PROBLEM 165
1. Open the Northern Lights file.
2. Journalize the adjusting entries using the Make General Journal Entries window.
3. Print a Profit & Loss Standard report using January 1 and December 31 for the dates.
4. Journalize the closing entry for Dividends using the Make General Journal Entries window.
5. Print a Journal report, a Balance Sheet Standards report, and a Trial Balance report. The trial balance will show
only balance sheet accounts so you will need to edit the Report Title field to read “Post-Closing Trial Balance.”
Edit the Subtitle field to read “As of December 31.”
506
Chapter 16
Recording Adjusting and Closing Entries for a Corporation
Copyright 2009 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.
F O R M AT T I N G G R I D L I N E S O N R E P O R T S
What do a football field and journal paper have in common? Each has many lines to help provide structure to its
activity. Lines on the football field guide players where to run and mark the end zones. Journal paper lines guide
accountants where to write account information and related amounts. These lines also help readers accurately
locate information on a journal.
Spreadsheets also display row and column lines, called gridlines, to provide you with this structure as you enter
text and numbers in a template. Unfortunately, these lines do not automatically appear on printed output.
Lines can be added to an electronic spreadsheet using two methods. A single command will print all gridlines.
This quick solution may be overwhelming as the lines surrounding every cell will be printed. In contrast, the Borders
tool allows you to insert a variety of line styles exactly where you want them–you decide what lines will provide
readers with the structure they need.
EXCEL APPLICATION PROBLEM 163
Open the F16-3 Excel data file. Follow the step-by-step instructions in the Instructions work sheet. Use the Borders
tool to insert horizontal and vertical lines to provide structure to the trial balance.
ADJUSTING ENTRIES, CLOSING ENTRIES,
AND POSTCLOSING TRIAL BALANCE
Adjusting Entries
At the end of a fiscal period, many accounts need to be adjusted to recognize changes and expenses of the fiscal
period. Adjusting entries are recorded in the general journal. The reference used for adjusting entries is Adj.Ent.
After all adjusting entries have been entered and posted, the file should be saved with the letters BC in the filename.
BC stands for Before Closing. Once closing entries are posted, it is very difficult to correct any errors that may have
been made during the fiscal period. Therefore, having a file saved before the closing entries ensures that a beforeclosing file exists if corrections are necessary.
Closing Entries
In an automated accounting system, closing entries are generated and posted by the software. Automated Accounting automatically prepares all closing entries with the Generate Closing Journal Entries option from the Options
menu. Once generated, the journal entries should be examined for accuracy and then posted.
Post-Closing Trial Balance
After closing entries are journalized and posted, a general ledger trial balance report is selected from the Reports
menu. Because the closing entries have been posted, this trial balance is a post-closing trial balance.
AUTOMATED ACCOUNTING APPLICATION PROBLEM 164
Open file F16-4.AA8. Display the problem instructions and complete the problem.
AUTOMATED ACCOUNTING MASTERY PROBLEM 165
Open file F16-5.AA8. Display the problem instructions and complete the problem.
Recording Adjusting and Closing Entries for a Corporation
Chapter 16
Copyright 2009 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.
507
REINFORCEMENT
Activity 2—Part B
An Accounting Cycle for a Corporation:
End-of-Fiscal-Period Work
The ledgers used in Reinforcement Activity 2—Part A are needed to complete Reinforcement Activity 2—Part B.
Reinforcement Activity 2—Part B includes those accounting activities needed to complete the accounting cycle of Medical
Services Company (MSC).
END-OF-FISCAL-PERIOD WORK
INSTRUCTIONS:
12. Prepare a trial balance on a work sheet. Use December 31 of the current year as the date.
13. Complete the work sheet using the following adjustment information:
a. Office supplies inventory
$ 476.60
b. Store supplies inventory
817.00
c. Merchandise inventory
33,278.01
d. Uncollectible accounts are 2.0%
of credit sales of $65,000.00
e. Value of prepaid insurance
$ 500.00
f. Estimate of office equipment
depreciation
3,520.00
g. Estimate of store equipment
depreciation
2,240.00
14. Using the tax table shown in Chapter 14, calculate
federal income tax expense and record the income
tax adjustment on the work sheet.
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Reinforcement Activity 2—Part B
15. Prepare an income statement. Figure and record
the following component percentages of net sales:
(a) cost of merchandise sold, (b) gross profit on sales,
(c) total expenses, and (d) net income or loss before
federal income tax. Round percentage calculations
to the nearest 0.1%.
16. Prepare a statement of stockholders’ equity. The
company had 9,500 shares of $1.00 par value stock
outstanding on January 1. The company issued an
additional 500 shares during the year.
17. Prepare a balance sheet in report form.
18. Calculate the earnings per share and price-earnings
ratio. The current market price of the stock is $87.50.
19. Use page 13 of a general journal. Journalize and post
the adjusting entries.
20. Use page 14 of a general journal. Journalize and post
the closing entries.
21. Prepare a post-closing trial balance.
An Accounting Cycle for a Corporation: End-of-Fiscal-Period Work
Copyright 2009 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.
This simulation covers the realistic transactions completed by Unique
Global Imports. The business sells imported goods, including fabrics,
clothing, furniture, and decorative accessories.
Transactions are recorded in special journals similar to the ones used
by Hobby Shack, Inc., in this accounting cycle. The activities included in
the accounting cycle for Unique Global Imports are listed below.
This real-life business simulation comes with source documents. It
is available in manual and automated versions. The automated version is
used with Automated Accounting software.
The following activities are included in the Unique Global Imports simulation:
1
Recording transactions in
special journals from source
documents.
2
Posting items to be posted
individually to a general
ledger and subsidiary ledgers.
3
4
Recording a payroll in a
payroll register. Updating the
employee earnings records.
Recording payroll journal
entries.
Posting column totals to a
general ledger.
5
6
7
Preparing schedules of
accounts receivable and
accounts payable from
subsidiary ledgers.
Preparing a trial balance on
a work sheet.
Planning adjustments and
completing a work sheet.
8
Preparing financial statements.
9
Journalizing and posting
adjusting entries.
An Accounting Cycle for a Corporation: End-of-Fiscal-Period Work
10 Journalizing and posting
closing entries.
11 Preparing a post-closing
trial balance.
12 Preparing a post-closing
trial balance.
13 Completing Think Like
an Accountant Financial
Analysis.
Reinforcement Activity 2—Part B
Copyright 2009 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.
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